Titan International, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2015. Titan manufactures wheels, tires, wheel and tire assemblies, and undercarriage systems for agricultural, earthmoving/construction, and consumer applications. The financial statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $376.1 million | $523.7 million | $778.1 million | $1,062.7 million |
| Gross profit | $51.1 million | $20.8 million | $93.8 million | $72.8 million |
| Gross margin | 13.6% | 4.0% | 12.1% | 6.8% |
| Income (loss) from operations | $7.5 million | $(29.5) million | $8.3 million | $(29.2) million |
| Net income (loss) attributable to Titan | $6.8 million | $(20.5) million | $7.0 million | $(18.3) million |
| Diluted EPS | $0.12 | $(0.38) | $0.13 | $(0.34) |
- Sales declined 28% in the quarter and 27% year to date. Management attributed the decline primarily to lower agricultural demand, continued mining weakness, unfavorable currency translation, lower price/mix, and competitive pressure.
- Gross margin improved despite lower sales, supported by cost reductions, productivity initiatives, lower raw-material and warranty costs, and pricing optimization under the Business Improvement Framework.
- Agricultural sales decreased 32% in both the quarter and first half. Earthmoving/construction sales decreased 17% in the quarter and 12% year to date. Consumer sales decreased 39% in both periods.
- Six-month cash provided by operating activities was $7.8 million, compared with $43.1 million in 2014. Capital expenditures were $22.5 million, and cash used for investing activities was $19.8 million.
- Cash and cash equivalents were $187.5 million at June 30, 2015, down from $201.5 million at December 31, 2014. Accounts receivable increased to $224.7 million, while inventories declined to $306.1 million.
- Total debt was $520.3 million, including $400.0 million of 6.875% senior secured notes due 2020 and $60.2 million of convertible notes due 2017. Net debt was approximately $332.9 million based on reported cash and debt.
- The company had no borrowings under its $150 million revolving credit facility; reported availability was $97.5 million, limited by eligible receivables and inventory.
Material changes versus the prior comparable period
- Profitability improved from losses to positive operating and net income, but reported sales remained substantially below 2014 levels.
- The second quarter and first half of 2014 included $23.2 million of mining asset impairment and $11.6 million of mining inventory writedowns. Excluding these items, 2014 gross profit and operating income were $55.6 million and $5.3 million for the quarter, and $107.5 million and $5.6 million for the first half. Accordingly, underlying operating improvement was more limited than the reported year-over-year change suggests.
- Other income included currency exchange gains of $3.6 million for the quarter and $9.6 million year to date. The company identified an improperly classified subsidiary investment and reclassified amounts from accumulated other comprehensive income to currency exchange gain; the correction contributed $5.7 million to the quarter and $3.1 million year to date.
- Accumulated other comprehensive loss increased to $150.9 million from $112.6 million at year-end, primarily because of a $40.0 million unfavorable currency translation adjustment for the first half.
- Warranty liability declined to $26.5 million from $28.1 million at December 31, 2014. Pension contributions were $2.2 million during the first half.
Outlook, risks, contingencies, and unusual items
- Management expects agricultural weakness to continue through 2015 because of lower farm income, commodity prices, and reduced demand for high-horsepower equipment. Mining demand is also expected to remain weak, while smaller construction equipment demand has improved.
- The consumer market is expected to remain highly competitive. Currency movements, commodity and raw-material costs, fixed overhead, pricing pressure, and economic conditions may materially affect margins.
- Planned capital expenditures for the remainder of 2015 were approximately $25 million to $30 million. Forecast interest payments for the remainder of 2015 were approximately $16 million, including the expected $13.8 million semiannual payment on the senior secured notes.
- The company expects cash on hand, operating cash flows, and available borrowings to fund working capital, capital expenditures, and potential acquisitions, although revolving-facility availability has declined with lower sales.
- Disclosure controls were deemed ineffective at June 30, 2015 because of a previously reported material weakness involving accounting complexities, insufficient resources, and controller continuity at certain international locations. Management was implementing additional resources and revised corporate accounting controls.
- Routine litigation is pending, but management does not currently expect any individual or aggregate matter to have a material adverse effect. The filing states that there were no material changes to previously disclosed risk factors.
- The filing contains an internal inconsistency in the MD&A narrative describing first-half operating cash flow as “used”; the consolidated cash flow statement reports $7.8 million of cash provided by operating activities. This should be verified against the filed financial statements.
Important facts for investors to verify
- Whether agricultural and mining market weakness persists and how quickly volume, price/mix, and currency pressures normalize.
- The sustainability of margin improvement after adjusting for the nonrecurring 2014 mining impairment and inventory writedown.
- Remediation progress for the material weakness in international financial reporting controls.
- Liquidity through the 2017 convertible-note maturity and 2020 senior secured-note maturity, including covenant compliance and revolving-facility availability.
- The effect of currency movements and the unusual subsidiary-investment reclassification on reported earnings and comprehensive income.
- Whether operating cash generation improves, given higher days sales outstanding of 54 days and inventory days of 76 days at June 30, 2015.